As elected officials, we’re asked to make difficult policy decisions every day. It’s the job that voters have sent us to Washington to do, and weighing critical questions of national security, foreign policy and the future of this great nation requires great thought and a careful hand.
But what’s not difficult is embracing policies that support our state and local governments, encourage improvements and investments in our schools, roads and hospitals, and allow businesses to reinvest in our communities. Similarly, it’s an easy choice to act when we see that existing policies are stunting economic growth, limiting infrastructure investment, and creating unintended consequences that prevent businesses and municipalities alike from improving the everyday lives of our constituents.
That’s why we have teamed up to introduce a bipartisan bill, the Consumer Financial Choice and Capital Markets Protection Act, HR 2319, to restore an important source of liquidity for state and local governments and the financing of critical infrastructure projects in communities across the nation, and the many good jobs supported by those activities.
The legislation, which has over 60 co-sponsors in the House, has the support of over 300 national, state and local organizations representing public and private sector finance officers, trade unions and local chambers of commerce. It would reverse the significant unintended consequences of changes adopted by the Securities and Exchange Commission (SEC) to Rule 2a-7, governing money market mutual funds.
The private and public-sector stakeholders that have joined us in supporting our legislation understand that it will benefit communities by facilitating increased investments in infrastructure improvements and economic development.
The regulation in question was adopted by the SEC in July 2014 and took effect in October 2016. It requires money market mutual funds that are available to treasurers, pension fund managers, and other institutions that invest short term cash to no longer operate on a stable net asset value (NAV) basis.
As of result of the rule’s implementation, investors pulled about $1 trillion out of prime funds, a significant source of short-term lending for businesses and state and local governments. Municipal funds, a key source of funding for state and local governments and their infrastructure projects, experienced a 50% decline, which caused borrowing costs to increase from 1 to 92 basis points between January 2016 and August 2017, or more than double the Fed rate increases on an after-tax basis over the same period.
In testimony before the Capital Markets Subcommittee on November 2, Government Finance Officers Association President Pat McCoy noted that
[T]he impact of the SEC rule on governments is real and it affects not only large governmental entities like mine (New York Metropolitan Transportation Authority), but also small communities throughout the country.
Many state and local governments determined that issuing variable rate debt to MMMFs was excessively costly, and opted to issue higher cost fixed-rate bonds…These increased costs are shouldered by taxpayers and ratepayers.
The National Association of Corporate Treasurers (NACT) outlined the significant negative impacts that the SEC rule is having on business borrowers as well. The SEC rule, NACT President Tom Deas wrote, forces corporate treasurers “to utilize sub-optimal investment alternatives,” and that enactment of our legislation would “allow main street companies to manage their cash flows securely, fund their businesses in the most cost-effective way, and more readily contribute to economic growth.”
According to a recent report by Treasury Strategies, a Chicago-based treasury consulting firm, the impact of the SEC rule has fallen on the shoulders of Main Street businesses who have been crowded out of bank lending sources. That’s because large, highly-rated corporate borrowers have easily replaced the funding they lost from prime funds with bank borrowings. Overall, according to the report, for each $1 billon of prime money market fund debt that a large company replaces with bank borrowing, 10,000 Main Street businesses lost access to $100,000 in funding.
Our legislation does not require any fund company to offer stable value money market funds, so there is no reason for any of them to be concerned about regulatory fatigue or additional regulatory oversight by federal financial agencies. It simply allows fund companies to opt to provide choices to municipalities and businesses seeking market returns on low-risk investments of operating cash, and lower-cost borrowing options that save tax dollars and create economic growth.
Though this issue may seem complicated, we view our legislation as a straightforward solution that will bring about more economic growth, improve municipal finances, and restore vibrancy to this segment of the capital markets. HR 2319 is scheduled for consideration by the House Financial Services Committee this week.